Glass-Steagall and FDIC Insurance

If my memory of financial history is correct, G-S was enacted in response to wholesale bank failures during the depression. At the time, Congress thought that many of the bank failures could be attributed to bank activities in the stock market and other businesses not normally considered to be under the umbrella of banking operations. Among other changes, G-S stopped an institution from operating both banking and non-banking businesses, and introduced FDIC Insurance up to $2,500 of deposits.

Now Congress is ready to revoke G-S but keep FDIC insurance in force. The lawmakers are apparently paying no attention to why the law was enacted in the first place. As an example of Congressional meddling, back in 1986 we passed a tax law that significantly reduced the benefits of deductions for depreciation on buildings. It never occured to Congress that reducing a tax benefit also reduces the fair market value of real estate. As a result of the law change, S&L's saw the collateral (i.e.-real estate) decline below the values of many loans they had previously made. The resuly was a raft of bankruptcies that we, as taxpayers, had to make good. In retrospect, it seems apparent that much of the S&L crisis was caused by that ridiculous change in tax laws. Now we are doing it again- don't we ever learn?

After G-S repeal, let's say a bank goes into an insurance business that produces a huge loss. Assume further that the insurance operation loss takes out the bank. We, as taxpayers, would then have to bail out the FDIC when it makes good on the bank's deposits. Doesn't this ever end?

Answers

A bank going into the insurance business should hire actuaries
(insurance mathematicians) to help them understand what their true
risks are... They should also employ what is known as reinsurance to
spread their risks to others. Therefore, if they operate in a prudent
manner, they should not be forced to absorb undue risks. If on the
other hand, they reinvest the premiums they receive in flaky
investments, they may not have the money to pay legitimate, expected
claims.

The question is, will they behave in a reasonable, businesslike
manner? I would expect them to do so...

What if the bank goes under because of its insurance business? Who
makes the depositors whole? The entire thrust of G-S was to make our
citizens comfortable enough to put their money into banks by offering
FDIC coverage. If this coverage is extended to a bank/insurance
company, that is tantamount to having federal insurance against non-
banking losses. Why should our my tax dollars go to a bailout of
depositors who put their money into insurance companies? The next
step is to insure investors against stock losses.

At this point, Insurance companies are so far away from actuarial
models in terms of assets that these are truly a joke. Ins co's are
so deeply into investments (REIT's, etc) that they are paying claims
from "earnings" in other sectors. Those other sectors are eventually
going to make life interesting as they go illiquid or heavily
decrease in value.

This has been coming for a while. What this IS is a bailout of the
ins industry, across the board. Which has been in the offing for
about 5 years.

I have to agree about the S&L crisis - the FSLIC was wiped out
because of the devaluation of the properties they were holding,
conflicting federal laws that restricted their ability to adapt to
market changes, and a drop in the oil industry.

With the banks new ability to join up with the securities
companies/insurance companies it will allow:

1. Larger companies to join forces, which will crush competition and
raise prices; and

2. Raise the level of risk in each of the banking mergers. With the
banks' basic premise is to gain more profits based on SPECULATION
rather than increased customers.

The bull market is going to end sometime folks. Think about it.
From the beginning of the stockmarket to Oct. 18, 1987, it was only
at about 2,700 points or so. In the past TWELVE YEARS, we've gained
ANOTHER 9,000 points. THAT IS NOT SUSTAINABLE GROWTH - moderation
must be used in order to have stability.

Also think of it this way - layoffs and paycuts are "good news" for
the stock market (profits increase). Do you actually want banks to
endorse that kind of thinking. "More money for me even though
someone else has to suffer for it?" What does that say about our
society?! I say enough of the madness and greed - it's time to re-
think our priorities!!!

If that's not enough to bother you, think of it this way: If we
continue along this reckless path, I've got a feeling that we're
going to have another bank crisis, just like the Asians did if we
don't start looking long-term instead of making a quick buck.

SIPC (the Securities Investor Protection Corporation) does not
function in a similar fashion as the FDIC -- and it never has. SIPC
insurance insures the customers of insurd broker-dealers, up to
$500,000 per account, against loss as a result of the trading system
or on the fault of the broker-dealer (i.e., you can still lose your
money when investing through an SIPC-insured firm, but you do so as a
result of increases or decreases in the value of your securities, not
as a result of computer glitches or similar problems).

Unlike the FDIC, the SIPC has no supervisory powers and does not
assist failing firms. The corporation is funded by member
assessments and portfolio income.

Now, whether or not the repeal of Glass Steagall is good policy is
another question. However, one should understand the issues before
making the simple statement "this is just like 1929." There is much
half-educated opinion on this board.